Banking package – what's new?

The banking package was adopted on 20 May 2019 by way of two directives, Directives (EU) 2019/878 (CRD V) and 2019/879 (BRRD II), and two regulations, Regulations (EU) 2019/876 (CRR II) and 2019/877 (SRMR II). These new European acts amend Directive 2013/36/EU (CRD), Directive 2014/59/EU (BRRD), Regulation (EU) 575/2013 (CRR) and Regulation 806/2014 (SRMR) respectively. The new regime will enter into force on 28 December 2020 or on 28 June 2021.

The overall objective of these reforms is to further reduce risks in the banking sector. A series of amendments aim at implementing reforms agreed at the international level by the Basel Committee and the Financial Stability Board.

With regard to the capital requirements of credit institutions, a leverage ratio is finally imposed as well as a net stable funding ratio (NSFR).

Risk-sensitive capital requirements are also strengthened for banks that are very active in trading in securities and derivatives. Global systemically important institutions (G-SIIs) are subject to increased requirements for loss absorption capacity and recapitalisation in the event of resolution.

The standard on "Total Loss-Absorbing Capacity" (TLAC) developed by the Financial Stability Board and applicable to G-SIIs only is incorporated into the European rules on "minimum requirements for own funds and eligible liabilities" (MREL). The TLAC standard and the MREL have the same objective (loss absorption and recapitalisation capacity), hence the need for harmonised regulation.

The main changes to the regulatory framework are described below.

CRR II

New minimum requirements for own funds

CRR II adds a 3% leverage ratio to the own funds requirements applicable to all institutions subject to CRD (Article 92 CRR). For G-SIIs, the leverage ratio must be increased by 50% of the G-SII buffer rate concerned. The leverage ratio is equal to the institution's amount of Tier 1 capital (CET1 and AT1) divided by the amount of all its unweighted assets (including off-balance sheet items and derivatives) (new Article 429 CRR). It is calculated as the institution's capital measure divided by the institution's total exposure measure.

CRR II also imposes on institutions a binding net stable funding ratio (NSFR) of at least 100%. The NSFR is equal to the available stable funding divided by the required stable funding. The amount of available stable funding is calculated by multiplying the institution's liabilities and own funds by appropriate factors that reflect their degree of reliability over the one-year horizon of the NSFR. The amount of required stable funding is calculated by multiplying the institution's assets and off-balance-sheet exposures by appropriate factors that reflect their liquidity characteristics and residual maturities over the one-year horizon of the NSFR. A 100% NSFR therefore indicates that an institution holds sufficient stable funding to meet its funding needs over a one-year horizon under both normal and stressed conditions.

TLAC standard

A harmonised minimum level of TLAC for G-SIIs is introduced into CRR. The institution-specific requirements are introduced into BRRD and SRMR, in line with the framework set out in CRD V and CRR II.

The new regulatory framework of CRR II incorporates the TLAC standard by introducing a new requirement for own funds and eligible liabilities. Other specific amendments to BRRD and SRMR are also implemented. The minimum requirement for a sufficient amount of own funds and highly loss absorbing liabilities introduced in CRR only applies to G-SIIs. However, the rules concerning eligible liabilities introduced into CRR apply to all institutions.

Revision of risk-weighting and large exposure standards

CRR II strengthens the own funds requirements for market risks standards, in application of the fundamental review of the trading book (FRTB) initiated by the Basel Committee.

CRR II reinforces the conditions for using the internal models approach to ensure greater consistency and comparability.

Amendments to CRR also aim at making the requirements proportionate. Therefore, CRR II allows institutions with small trading book activities (equal to or less than both EUR 100 million and 5% of their total assets) to apply the credit risk framework for banking book positions to their trading book. Institutions with medium-sized trading book business (equal to or less than both EUR 300 million and 10% of their total assets) may use the simplified standardised approach, which is equivalent to the existing standardised approach.

CRR II also improves the prudential treatment of large exposures.

Finally, CRR II reduces own funds requirements for exposures to SME financing and investments in infrastructure projects (Articles 501a to 501c CRR). This regime is similar to the new proposed regime for insurance undertakings.

CRD V

Group supervision

CRD V makes a series of amendments to supervision on a consolidated basis with regard to financial holding or mixed holding companies.

The application of prudential requirements may be imposed on financial holding companies and mixed financial holding companies (holding companies). They will now be able to be held responsible for ensuring compliance with prudential requirements on a consolidated basis.

Remuneration

CRD V applies the proportionality principle in the rules regarding variable remuneration and streamlines some rules in this sensitive matter.

Additional own funds requirement

CRD V harmonises and refines the application of the risk-based additional own funds requirement.

Systemic risk buffer rate

In addition to a capital conservation buffer and a countercyclical capital buffer, CRD V introduces the possibility for Member States to require certain credit institutions to hold a systemic risk buffer.

CRD V strengthens the role of the European Systemic Risk Board (ESRB).

BRRD II

Resolution entities and resolution groups

BRRD II introduces the concept of a "resolution entity", which indicates an entity to which resolution actions could be applied.

Adaptation to the TLAC standard

In order to align the denominators that measure the loss absorbing and recapitalisation capacity of institutions and entities with those provided for in the TLAC standard, the MREL will be expressed as a percentage of the total risk exposure amount and of the total exposure measure of the institution or entity.

Eligible instruments and subordination

The eligibility criteria required for instruments to be recognised as TLAC or MREL eligible liabilities are harmonised with the criteria set out by CRR II for the TLAC standard.

BRRD II also introduces a new category, top-tier banks, with a total asset value above EUR 100 billion. G-SIIs and top-tier banks are subject to stricter rules for the subordination of their eligible instruments. In principle, a part of the MREL of G-SIIs and top-tier banks equal to 8% of the total liabilities, including own funds, must be met using own funds or subordinated eligible instruments.

The NCWO ("no creditor worse off") principle is maintained: the resolution may not cause more damage to the institution's creditors than normal insolvency proceedings.

The minimum denomination amount that Member States may set for some MREL instruments will be at least EUR 50,000.

Possibility of additional individual MREL for G-SIIs

To enhance the resolvability of G-SIIs, resolution authorities will be able to impose on them an institution-specific MREL in addition to the TLAC minimum requirement set out in CRR II. That institution-specific MREL will be imposed if the TLAC minimum requirement is not sufficient to absorb losses and to recapitalise a G-SII under the chosen resolution strategy.

Non-compliance with the TLAC minimum requirement and the MREL

Breach of the TLAC minimum requirement and of the MREL may lead to the faster application of measures by the resolution authorities and will in particular enable them to prohibit certain distributions in the event of failure to meet the overall own funds requirement (Article 16a BRRD).

Power of resolution authorities to temporarily suspend contractual obligations

The power of resolution authorities to suspend, for a limited period, certain contractual obligations of institutions and entities is adapted. Thus, a resolution authority will be allowed to exercise that power before an institution or entity is put under resolution; from the moment when the determination is made that the institution or entity is failing or likely to fail; if a private sector measure which, in the view of the resolution authority, would, within a reasonable timeframe, prevent the failure of the institution or entity is not immediately available; and if exercising that power is deemed necessary to avoid the further deterioration of the financial conditions of the institution or entity. The duration of the suspension will be limited to a maximum of two business days. The suspension may continue to apply after the resolution decision is taken up to that maximum period.

The power to suspend may be applied to covered deposits, subject to certain conditions.

The period of the suspension will have to be used by the resolution authority to consider the possibility of the institution being wound up instead of resolved.

SRMR II

SRMR II incorporates the amendments to BRRD at the level of the single resolution mechanism. The amendments to BRRD are applicable mutatis mutandis to SRMR, it being understood that, under SRMR, the resolution authority is the Single Resolution Board (SRB).

Entry into force

The amendments to CRD IV must be implemented by the Member States by 28 December 2020 and be applicable as from the following day. Apart from a series of exceptions, the amendments to CRR are applicable as from 28 June 2021. The amendments to BRRD must be implemented by the Member States and be applicable by 28 December 2020. SRMR is amended and applicable as from 28 December 2020 as well. This transition period enables credit institutions to comply with the modifications to the regulatory framework.